Financial risk minimization
Financial risk minimization – the use of various methods that enable
reduce the degree of influence of financial risk.
In conditions of uncertainty, to obtain an economic profit, an entrepreneur must know that it is necessary not to avoid the inevitable risk, but to be able to feel the risk, assess its degree and not go beyond the acceptable limits. Given this, great attention should be paid to studying the main methods of risk management and the search for ways and directions of their minimization [Laktionova].
Risks are typically managed in one of three ways:
– Off-loading the risk onto somebody else.
– Hedging the risk.
– Doing nothing and accepting the risk as is[Penzo].
The decision on which of those three options to employ is usually a factor of how much money you are willing to spend to mitigate the risk and the level of risk you’re willing to accept.
The principles of financial risk minimization include the following:
– Awareness of risk-taking - managers must be aware
of the certainty and objectivity of the influence of financial risks.
– Management of accepted risks - part of the financial portfolio
risks should include mainly those that can be neutralized
in the management process.
– Economic rationality of management - from all alternative management solutions, the one that provides the most outstanding efficiency and financial
safety
– Taking into account the subject's financial philosophy - reflects the financial mentality of the founders (attitude to risk): aversion, neutrality, commitment to risk.
– Taking into account the financial policy for certain aspects of financial activity (aggressive, moderate, or conservative policy).
– Comparison of the level of accepted risks with the level of profitability of financial operations. Any type of risk for which its level is higher than the level
expected return (including the risk premium) should be discarded
(or, accordingly, premiums for such risk should be reviewed).
– Comparison of the level of accepted risks with financial opportunities
enterprises.
– Consideration of the time factor in risk management. At the same time, the longer the period of the financial transaction, the more comprehensive the range of accompanying risks.
– Independence of personal risk management.
– Cost-effectiveness of management – risk management costs should not
exceed the amount of possible financial losses [Laktionova:120].
Laktionova, O. (2020). Управління фінансовими ризиками. Vinnytsia: Ministry of Education and Science of Ukraine, Donetsk National University of Vasyl Stus
Penzo, L. (2013). 9 Important Tips for Managing Financial Risk. Insider. Retrieved from: https://www.businessinsider.com/9-important-tips-for-managing-financial-risk-2013-4